Gaming’s Great Recession

In my previous publisher's note, I mentioned that the game industry was in a time of turmoil, a "Great Recession," with videogame companies cutting staff with a chain-gun. How bad is it out there right now?

Really bad. A month ago, NPD Group announced that gaming had suffered its biggest year-over-year sales drop in 9 years, with total game sales in North America down 31% in June compared to the same month last year. Research conducted by Wanda Meloni (published on Gamasutra) reported that 8,450 game developers had been laid off since July 2008, with over 12% of North American game professionals unemployed. Midway, Ensemble, Paradigm, Massive, Rainbow Studios, Juice Games, Electronic Arts, LucasArts, Rare, and Eidos are just a few of the firms that have restructured, downsized or shut down. "It's been so bad that they've even cancelled Duke Nukem Forever," joked one game industry analyst.

Since then it's gotten even worse. The public companies have all just announced quarterly revenues and profits, and it's virtually all grim news:

• Nintendo's profits are down 66%, and it is predicting a full-year decline of 12%. (Forbes) • Sony's revenues are down 19%, with its gaming division leading its losses. (Business Week)• Microsoft's Entertainment and Devices division is down 25% for the quarter. (Yahoo! News)• Ubisoft's sales are down 51%, and the company is delaying its key titles. (Games Industry) • THQ, calling 2009 "challenging" saw losses of $96.9 million this past quarter. (THQ)• Take-Two is reducing its 2009 expectations to reflect reduced sales and lower than anticipated orders of new releases, and (like Ubisoft) is delaying a major title to 2010. (Take-Two)• And Amazon blamed lackluster videogame and video game console sales for dragging down its revenues. (WSJ)

What's surprising about the game industry downturn is that it is a surprise. Back in April 2008, analysts were calling the game industry "near recession proof." In November 2008, CNET summarized the industry viewpoint as simply that "in rough times, people always spend money on entertainment, and that as entertainment goes, video game software and hardware offer much higher value than other options." And as recently as four months ago, analysts from IbisWorld, IDC, and Interpret were all predicting continued growth for the game industry through 2009, again saying "videogames provide strong entertainment value and typically do well during recessionary times."

Wedbush Morgan analyst Michael Pachter thinks this analysis is too simplistic. "It's helpful to split the video game consumer into two camps. The serious gamer generally does view games as part of his overall entertainment consumption and the cost of games is generally quite low when placed in the context of hours of enjoyment," he explained to The Escapist. "Thus, even at $60, a serious gamer may feel that games have great value, especially if they intend to play for 20 hours or more. But the casual gamer spends far less time playing games, and the cost per hour of a game purchase may seem quite high. If the casual gamers' experience is that they play a $20 or $40 game only an hour or two, then find themselves bored, it's easy to see how they forgo this type of purchase when money gets tight.